##### 



EXHIBIT 13
 ANNUAL REPORT TO STOCKHOLDERS






---



##### 



[LETTERHEAD
OF TRI-COUNTY FINANCIAL CORPORATION]




---



##### 



COMPARISON OF FIVE-YEAR TOTAL RETURN
  Tri-County Financial Corporation
 
 Period EndingIndex
    
    12/31/02
    
    12/31/03
    
    12/31/04
    
    12/31/05
    
    12/31/06
    
    12/31/07Tri-County Financial Corporation
    
    $
    100.00
    
    
    $
    109.21
    
    
    $
    178.31
    
    
    $
    202.55
    
    
    $
    222.11
    
    
    $
    224.15NASDAQ Composite
    
    
    100.00
    
    
    
    150.01
    
    
    
    162.89
    
    
    
    165.13
    
    
    
    180.85
    
    
    
    198.60SNL Mid-Atlantic Bank Index
    
    
    100.00
    
    
    
    142.18
    
    
    
    150.59
    
    
    
    153.26
    
    
    
    183.94
    
    
    
    139.10




---



##### 



Forward-Looking Statements
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   Critical Accounting Policies
  1




---



##### 



Allowance for Loan Losses
     Deferred Tax Assets
    2




---



##### 



Comparison of Results of Operations For the Years Ended December 31, 2007 and 2006
 General.
 Net Interest Income.
   3




---



##### 



4




---



##### 



2007

    
    2006Average

    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/

    
    Average
    
    
    
    
    
    
    Yield/dollars in thousands
    
    Balance
    
    
    Interest(2)
    
    
    Cost

    
    Balance
    
    
    Interest
    
    
    CostAssetsInterest-earning assets:Loan portfolio (1)
    
    $
    438,276
    
    
    $
    33,048
    
    
    
    7.54
    %
    
    $
    398,381
    
    
    $
    29,292
    
    
    
    7.35
    %Investment securities, federal funds
sold and interest-bearing deposits
    
    
    119,101
    
    
    
    5,850
    
    
    
    4.91
    %
    
    
    135,824
    
    
    
    6,394
    
    
    
    4.71
    %Total interest-earning assets
    
    
    557,377
    
    
    
    38,898
    
    
    
    6.98
    %
    
    
    534,205
    
    
    
    35,686
    
    
    
    6.68
    %Cash and due from banks
    
    
    3,004
    
    
    
    
    
    
    
    
    
    
    
    4,072Other assets
    
    
    22,505
    
    
    
    
    
    
    
    
    
    
    
    20,133$
    582,886
    
    
    
    
    
    
    
    
    
    
    $
    558,410Liabilities and Stockholders EquityInterest-bearing liabilities:Savings
    
    $
    28,391
    
    
    $
    275
    
    
    
    0.97
    %
    
    $
    34,570
    
    
    $
    409
    
    
    
    1.18
    %Interest-bearing demand and money
market accounts
    
    
    137,001
    
    
    
    4,115
    
    
    
    3.00
    %
    
    
    104,410
    
    
    
    3,053
    
    
    
    2.92
    %Certificates of deposit
    
    
    222,769
    
    
    
    10,511
    
    
    
    4.72
    %
    
    
    204,675
    
    
    
    8,609
    
    
    
    4.21
    %Long-term debt
    
    
    86,993
    
    
    
    3,906
    
    
    
    4.49
    %
    
    
    101,520
    
    
    
    4,491
    
    
    
    4.42
    %Short-term debt
    
    
    2,901
    
    
    
    132
    
    
    
    4.55
    %
    
    
    18,129
    
    
    
    905
    
    
    
    4.99
    %Guaranteed preferrred beneficial interest
in junior subordinated debentures
    
    
    12,000
    
    
    
    967
    
    
    
    8.06
    %
    
    
    12,000
    
    
    
    892
    
    
    
    7.43
    %Total Interest-Bearing Liabilities
    
    
    490,055
    
    
    
    19,906
    
    
    
    4.06
    %
    
    
    475,304
    
    
    
    18,359
    
    
    
    3.86
    %Noninterest-bearing demand deposits
    
    
    45,969
    
    
    
    
    
    
    
    
    
    
    
    42,030Other liabilities
    
    
    6,398
    
    
    
    
    
    
    
    
    
    
    
    4,444Stockholders equity
    
    
    40,464
    
    
    
    
    
    
    
    
    
    
    
    36,632Total Liabilities and Stockholders
Equity
    
    $
    582,886
    
    
    
    
    
    
    
    
    
    
    $
    558,410Net interest income
    
    
    
    
    
    
    18,992
    
    
    
    
    
    
    
    
    
    
    
    17,327Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.92
    %
    
    
    
    
    
    
    
    
    
    
    2.82
    %Net yield on interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.41
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %Ratio of average interest-earning
assets to average interest bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    113.74
    %
    
    
    
    
    
    
    
    
    
    
    112.39
    %
 
 1
    
    Average balance includes non-accrual loans2
    
    There are no tax equivalency adjustments 5




---



##### 



Year ended December 31, 2007compared to year endedDecember 31,2006Due todollars in thousands
    
    Volume
    
    
    Rate
    
    
    TotalInterest income:Loan portfolio (1)
    
    $
    3,008
    
    
    $
    748
    
    
    $
    3,756Investment securities, federal funds sold and interest bearing deposits
    
    
    (821
    )
    
    
    277
    
    
    
    (544
    )Total interest-earning assets
    
    $
    2,187
    
    
    $
    1,025
    
    
    $
    3,212Interest-bearing liabilities:Savings
    
    $
    (60
    )
    
    $
    (74
    )
    
    $
    (134
    )Interest-bearing demand and money
market accounts
    
    
    979
    
    
    
    83
    
    
    
    1,062Certificates of deposit
    
    
    854
    
    
    
    1,048
    
    
    
    1,902Long-term debt
    
    
    (652
    )
    
    
    67
    
    
    
    (585
    )Short-term debt
    
    
    (693
    )
    
    
    (80
    )
    
    
    (773
    )Guaranteed preferred beneficial
interest
in junior subordinated debentures
    
    
    
    
    
    
    75
    
    
    
    75Total interest-bearing liabilities
    
    $
    428
    
    
    $
    1,119
    
    
    $
    1,547Net change in net interest income
    
    $
    1,759
    
    
    $
    (94
    )
    
    $
    1,665
 Provision for Loan Losses.
 Noninterest Income.
 %Years Ended December 31,
    
    
    change2007 vs.dollars in thousands
    
    2007
    
    
    2006
    
    
    2006Loan appraisal, credit, and miscellaneous charges
    
    $
    358,946
    
    
    $
    362,145
    
    
    
    (0.88
    %)Income from bank owned life insurance
    
    
    361,527
    
    
    
    328,586
    
    
    
    10.03
    %Service charges
    
    
    1,436,290
    
    
    
    1,359,409
    
    
    
    5.66
    %(Loss) gain on the sale of investment securities
    
    
    (27,335
    )
    
    
    197,001
    
    
    
    (113.88
    %)Gain on sale of foreclosed property
    
    
    1,272,161
    
    
    
    
    
    
    naTotal noninterest income
    
    $
    3,401,589
    
    
    $
    2,247,141
    
    
    
    51.37
    %
 6




---



##### 



Noninterest Expenses.
 %Years Ended December 31,
    
    
    change2007 vs.dollars in thousands
    
    2007
    
    
    2006
    
    
    2006Noninterest expenseSalary and employee benefits
    
    $
    7,604,140
    
    
    $
    7,006,369
    
    
    
    8.53
    %Occupancy expense
    
    
    1,340,820
    
    
    
    1,316,261
    
    
    
    1.87
    %Advertising
    
    
    469,995
    
    
    
    474,554
    
    
    
    (0.96
    %)Data processing expense
    
    
    833,726
    
    
    
    821,392
    
    
    
    1.50
    %Depreciation of furniture, fixtures, and equipment
    
    
    665,974
    
    
    
    513,348
    
    
    
    29.73
    %Telephone communications
    
    
    87,176
    
    
    
    93,319
    
    
    
    (6.58
    %)ATM expenses
    
    
    293,656
    
    
    
    274,403
    
    
    
    7.02
    %Office supplies
    
    
    161,538
    
    
    
    141,144
    
    
    
    14.45
    %Professional fees
    
    
    646,779
    
    
    
    655,503
    
    
    
    (1.33
    %)Other
    
    
    1,355,549
    
    
    
    1,266,175
    
    
    
    7.06
    %$
    13,459,353
    
    
    $
    12,562,468
    
    
    
    7.14
    %
  Income Tax Expense.
 Comparison of Financial Condition at December 31, 2007 and 2006
 December 31,
    
    
    % change2007 vs.dollars in thousands
    
    2007
    
    
    2006
    
    
    2006AssetsCash and due from banks
    
    $
    3,267,920
    
    
    $
    3,157,595
    
    
    
    3.49
    %Fed Funds sold
    
    
    885,056
    
    
    
    772,351
    
    
    
    14.59
    %Interest-bearing deposits with banks
    
    
    7,273,661
    
    
    
    14,260,560
    
    
    
    (48.99
    %)Securities available for sale
    
    
    9,144,069
    
    
    
    9,301,676
    
    
    
    (1.69
    %)Securities held to maturity
    
    
    92,687,603
    
    
    
    97,804,849
    
    
    
    (5.23
    %)Federal Home Loan Bank and Federal Reserve Bank stock
    
    
    5,354,500
    
    
    
    6,100,400
    
    
    
    (12.23
    %)Loans receivable, net
    
    
    453,614,133
    
    
    
    422,479,799
    
    
    
    7.37
    %Premises and equipment, net
    
    
    9,423,302
    
    
    
    6,822,461
    
    
    
    38.12
    %
 7




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##### 



December 31,
    
    
    % change2007 vs.dollars in thousands
    
    2007
    
    
    2006
    
    
    2006Foreclosed real estate
    
    
    
    
    
    
    460,884
    
    
    
    (100.00
    %)Accrued interest receivable
    
    
    3,147,569
    
    
    
    2,837,413
    
    
    
    10.93
    %Investment in bank owned life insurance
    
    
    10,124,288
    
    
    
    8,762,761
    
    
    
    15.54
    %Other assets
    
    
    3,483,733
    
    
    
    2,735,265
    
    
    
    27.36
    %TOTAL ASSETS
    
    $
    598,405,834
    
    
    $
    575,496,014
    
    
    
    3.98
    %Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    48,041,571
    
    
    $
    43,723,436
    
    
    
    9.88
    %Interest-bearing
    
    
    396,952,444
    
    
    
    374,289,966
    
    
    
    6.05
    %Total deposits
    
    
    444,994,015
    
    
    
    418,013,402
    
    
    
    6.45
    %Short-term borrowings
    
    
    1,555,323
    
    
    
    6,567,702
    
    
    
    (76.32
    %)Long-term debt
    
    
    86,005,508
    
    
    
    96,045,936
    
    
    
    (10.45
    %)Guaranteed preferred beneficial interest in junior
subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    0.00
    %Accrued expenses and other liabilities
    
    
    5,003,912
    
    
    
    5,139,637
    
    
    
    (2.64
    %)TOTAL LIABILITIES
    
    
    549,558,758
    
    
    
    537,766,677
    
    
    
    2.19
    %Stockholders equity:Common stock
    
    
    29,100
    
    
    
    26,423
    
    
    
    10.13
    %Additional paid in capital
    
    
    16,914,373
    
    
    
    9,499,946
    
    
    
    78.05
    %Retained earnings
    
    
    32,303,353
    
    
    
    28,353,792
    
    
    
    13.93
    %Accumulated other comprehensive loss
    
    
    (73,097
    )
    
    
    (53,822
    )
    
    
    35.81
    %Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (97,002
    )
    
    
    236.75
    %Total stockholders equity
    
    
    48,847,076
    
    
    
    37,729,337
    
    
    
    29.47
    %TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    598,405,834
    
    
    $
    575,496,014
    
    
    
    3.98
    %
   8




---



##### 



Liquidity and Capital Resources
        Off Balance Sheet Arrangements
  9




---



##### 



Contractual Obligations
  Impact of Inflation and Changing Prices
  Material Commitments for Capital Expenditures
  10




---



##### 



Selected Financial Data
 Dollars in thousands except per share
data
 Year Ended December 31,2007
    
    2006
    
    2005
    
    2004
    
    2003Operations Data:Net interest income
    
    $
    18,992
    
    
    $
    17,327
    
    
    $
    15,571
    
    
    $
    13,800
    
    
    $
    10,469Provision for loan losses
    
    
    855
    
    
    
    406
    
    
    
    329
    
    
    
    453
    
    
    
    317Noninterest income
    
    
    3,402
    
    
    
    2,247
    
    
    
    1,641
    
    
    
    1,582
    
    
    
    1,755Noninterest expense
    
    
    13,459
    
    
    
    12,562
    
    
    
    10,851
    
    
    
    9,768
    
    
    
    8,428Net income
    
    $
    5,106
    
    
    $
    4,441
    
    
    $
    3,979
    
    
    $
    3,720
    
    
    $
    2,446Share Data:Basic net income per common share
    
    $
    1.92
    
    
    $
    1.68
    
    
    $
    1.53
    
    
    $
    1.44
    
    
    $
    0.96Diluted net income per common share
    
    $
    1.79
    
    
    $
    1.58
    
    
    $
    1.44
    
    
    $
    1.38
    
    
    $
    0.91Cash dividends paid per common share
    
    $
    0.40
    
    
    $
    0.37
    
    
    $
    0.35
    
    
    $
    0.21
    
    
    $
    0.16Weighted average commonShares outstanding:Basic
    
    
    2,664,036
    
    
    
    2,637,531
    
    
    
    2,597,806
    
    
    
    2,579,264
    
    
    
    2,544,899Diluted
    
    
    2,852,494
    
    
    
    2,815,985
    
    
    
    2,763,616
    
    
    
    2,697,030
    
    
    
    2,686,571Financial Condition Data:Total assets
    
    $
    598,406
    
    
    $
    575,496
    
    
    $
    541,287
    
    
    $
    505,767
    
    
    $
    351,730Loans receivable, net
    
    
    453,614
    
    
    
    422,480
    
    
    
    369,592
    
    
    
    289,325
    
    
    
    217,740Total deposits
    
    
    444,994
    
    
    
    418,013
    
    
    
    363,374
    
    
    
    266,755
    
    
    
    227,555Long and short term debt
    
    
    87,561
    
    
    
    102,614
    
    
    
    127,899
    
    
    
    198,235
    
    
    
    94,242Total stockholders equity
    
    $
    48,847
    
    
    $
    37,729
    
    
    $
    34,578
    
    
    $
    31,124
    
    
    $
    27,912Performance Ratios:Return on average assets
    
    
    0.87
    %
    
    
    0.80
    %
    
    
    0.74
    %
    
    
    0.87
    %
    
    
    0.78
    %Return on average equity
    
    
    12.62
    %
    
    
    12.13
    %
    
    
    12.11
    %
    
    
    12.89
    %
    
    
    8.99
    %Net interest margin
    
    
    3.41
    %
    
    
    3.24
    %
    
    
    3.05
    %
    
    
    3.43
    %
    
    
    3.55
    %Efficiency ratio
    
    
    60.10
    %
    
    
    64.18
    %
    
    
    63.04
    %
    
    
    63.50
    %
    
    
    68.95
    %Dividend payout ratio
    
    
    20.80
    %
    
    
    21.91
    %
    
    
    23.39
    %
    
    
    14.56
    %
    
    
    17.27
    %Capital Ratios:Average equity to average
assets
    
    
    10.41
    %
    
    
    8.74
    %
    
    
    8.62
    %
    
    
    9.29
    %
    
    
    8.04
    %Leverage ratio
    
    
    10.41
    %
    
    
    8.74
    %
    
    
    8.62
    %
    
    
    9.29
    %
    
    
    8.04
    %Total risk-based capital ratio
    
    
    13.80
    %
    
    
    11.98
    %
    
    
    11.93
    %
    
    
    11.89
    %
    
    
    12.20
    %Asset Quality Ratios:Allowance
for loan losses to total loans
    
    
    0.98
    %
    
    
    0.89
    %
    
    
    0.91
    %
    
    
    1.04
    %
    
    
    1.16
    %Nonperforming loans to total loans
    
    
    0.09
    %
    
    
    0.25
    %
    
    
    0.16
    %
    
    
    0.23
    %
    
    
    0.17
    %Allowance
for loan losses to Nonperforming loans
    
    
    1082.71
    %
    
    
    361.59
    %
    
    
    572.96
    %
    
    
    452.97
    %
    
    
    678.30
    %Net charge-offs to average loans
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    (0.01
    %)
    
    
    0.03
    %
  11




---



##### 



MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
 Market Information.
 2006
    
    High
    
    LowFourth Quarter
    
    $
    26.67
    
    
    $
    23.43Third Quarter
    
    $
    24.33
    
    
    $
    23.67Second Quarter
    
    $
    25.67
    
    
    $
    22.88First Quarter
    
    $
    22.67
    
    
    $
    21.532007
    
    High
    
    LowFourth Quarter
    
    $
    26.50
    
    
    $
    22.50Third Quarter
    
    $
    27.70
    
    
    $
    25.71Second Quarter
    
    $
    60.00
    
    
    $
    25.15First Quarter
    
    $
    27.00
    
    
    $
    24.00
 Holders.
 Dividends.
    12




---



##### 



Tri-County Financial Corporation
 Report on Audits of Consolidated Financial Statements
 For the Years Ended December 31, 2007 and 2006
 13




---



##### 



Table of contents
 Managements Report on Internal Control over Financial Reporting
    
    
    15Report of Independent Registered Public Accounting Firm
    
    
    16Consolidated Financial StatementsBalance Sheets
    
    
    17Statements of Income
    
    
    18Statements of Changes in Stockholders Equity
    
    
    19Statements of Cash Flows
    
    
    20Notes to Consolidated Financial Statements
    
    
    22
 14




---



##### 



Managements Report on Internal Control Over Financial Reporting
     15




---



##### 



[LETTERHEAD
OF STEGMAN & COMPANY]
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 16




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Balance Sheets
 As of December 31,2007
    
    
    2006AssetsCash and due from banks
    
    $
    3,267,920
    
    
    $
    3,157,595Federal Funds sold
    
    
    885,056
    
    
    
    772,351Interest-bearing deposits with banks
    
    
    7,273,661
    
    
    
    14,260,560Securities available for sale
    
    
    9,144,069
    
    
    
    9,301,676Securities held to maturity (fair value approximates $91,319,130
and $96,148,156, respectively)
    
    
    92,687,603
    
    
    
    97,804,849Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    5,354,500
    
    
    
    6,100,400Loans receivable -
Net of allowance for loan losses of $4,482,483 and $3,783,721
    
    
    453,614,133
    
    
    
    422,479,799Premises and equipment, net
    
    
    9,423,302
    
    
    
    6,822,461Foreclosed real estate
    
    
    
    
    
    
    460,884Accrued interest receivable
    
    
    3,147,569
    
    
    
    2,837,413Investment in bank owned life insurance
    
    
    10,124,288
    
    
    
    8,762,761Other assets
    
    
    3,483,733
    
    
    
    2,735,265TOTAL ASSETS
    
    $
    598,405,834
    
    
    $
    575,496,014Liabilities and Stockholders EquityDepositsNoninterest-bearing
    
    $
    48,041,571
    
    
    $
    43,723,436Interest-bearing
    
    
    396,952,444
    
    
    
    374,289,966Total deposits
    
    
    444,994,015
    
    
    
    418,013,402Short-term borrowings
    
    
    1,555,323
    
    
    
    6,567,702Long-term debt
    
    
    86,005,508
    
    
    
    96,045,936Guaranteed preferred beneficial interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    5,003,912
    
    
    
    5,139,637TOTAL LIABILITIES
    
    
    549,558,758
    
    
    
    537,766,677Commitments and Contingencies (Note 11)Stockholders EquityCommon stock  par value $.01; authorized - 15,000,000 shares;
issued 2,909,974 and 2,642,288 shares, respectively
    
    
    29,100
    
    
    
    26,423Additional paid in capital
    
    
    16,914,373
    
    
    
    9,499,946Retained earnings
    
    
    32,303,353
    
    
    
    28,353,792Accumulated other comprehensive loss
    
    
    (73,097
    )
    
    
    (53,822
    )Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (97,002
    )Total Stockholders Equity
    
    
    48,847,076
    
    
    
    37,729,337TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    598,405,834
    
    
    $
    575,496,014
 
 *
    
    See notes to consolidated financial statements 17




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Statements of Income
 Years Ended December 31,2007
    
    
    2006Interest and Dividend incomeLoans, including fees
    
    $
    33,047,979
    
    
    $
    29,292,419Taxable interest and dividends on investment securities
    
    
    5,550,086
    
    
    
    6,211,393Interest on deposits with banks
    
    
    300,047
    
    
    
    181,924Total interest and dividend income
    
    
    38,898,112
    
    
    
    35,685,736Interest ExpensesDeposits
    
    
    14,900,672
    
    
    
    12,062,016Short-term borrowings
    
    
    131,884
    
    
    
    921,934Long-term debt
    
    
    4,873,656
    
    
    
    5,374,978Total interest expenses
    
    
    19,906,212
    
    
    
    18,358,928Net interest income
    
    
    18,991,900
    
    
    
    17,326,808Provision for loan losses
    
    
    854,739
    
    
    
    405,809Net interest income after provision for loan losses
    
    
    18,137,161
    
    
    
    16,920,999Noninterest income:Loan appraisal, credit, and miscellaneous charges
    
    
    358,946
    
    
    
    362,145Income from Bank owned life insurance
    
    
    361,527
    
    
    
    328,586Service charges
    
    
    1,436,290
    
    
    
    1,359,409(Loss) gain on the sale of investment securities
    
    
    (27,335
    )
    
    
    197,001Gain on sale of foreclosed property
    
    
    1,272,161
    
    
    
    Total noninterest income
    
    
    3,401,589
    
    
    
    2,247,141Noninterest expensesSalary and employee benefits
    
    
    7,604,140
    
    
    
    7,006,369Occupancy expense
    
    
    1,340,820
    
    
    
    1,316,261Advertising
    
    
    469,995
    
    
    
    474,554Data processing expense
    
    
    833,726
    
    
    
    821,392Depreciation of furniture, fixtures, and equipment
    
    
    665,974
    
    
    
    513,348Telephone communications
    
    
    87,176
    
    
    
    93,319ATM expenses
    
    
    293,656
    
    
    
    274,403Office supplies
    
    
    161,538
    
    
    
    141,144Professional fees
    
    
    646,779
    
    
    
    655,503Other
    
    
    1,355,549
    
    
    
    1,266,175Total noninterest expenses
    
    
    13,459,353
    
    
    
    12,562,468Income before income taxes
    
    
    8,079,397
    
    
    
    6,605,672Income tax expense
    
    
    2,973,762
    
    
    
    2,164,415Net income
    
    $
    5,105,635
    
    
    $
    4,441,257Earnings per share:Basic
    
    $
    1.92
    
    
    $
    1.68Diluted
    
    $
    1.79
    
    
    $
    1.58Cash dividend paid
    
    $
    0.40
    
    
    $
    0.37
  
 *
    
    Share and per share data have been retroactively adjusted to effect the three-for-two common stock
splits of December 2006 as if it had occurred January 1, 2006 18




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Statements of Changes in Stockholders Equity
For the Years Ended December 31, 2007 and 2006
 AccumulatedOther
    
    
    UnearnedCommon
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    ESOPStock
    
    
    Capital
    
    
    Earnings
    
    
    (Loss) Income
    
    
    Shares
    
    
    TotalBalance at January 1, 2006
    
    $
    17,610
    
    
    $
    9,057,805
    
    
    $
    25,580,634
    
    
    $
    49,362
    
    
    $
    (127,255
    )
    
    $
    34,578,156Comprehensive IncomeNet Income
    
    
    
    
    
    
    
    
    
    
    4,441,257
    
    
    
    
    
    
    
    
    
    
    
    4,441,257Unrealized Holding Losses on
investment securities net of tax
of $64,841
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (103,184
    )
    
    
    
    
    
    
    (103,184
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,338,073Cash dividend  $0.37 per share
    
    
    
    
    
    
    
    
    
    
    (972,966
    )
    
    
    
    
    
    
    
    
    
    
    (972,966
    )Excess of fair market value over
cost of leveraged ESOP shares
released
    
    
    
    
    
    
    43,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,306Exercise of stock options
    
    
    163
    
    
    
    155,959
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156,122Proceeds of private placement
    
    
    50
    
    
    
    177,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    177,500Net change in unearned ESOP
shares
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,253
    
    
    
    30,248Repurchase of common stock
    
    
    (200
    )
    
    
    
    
    
    
    (686,328
    )
    
    
    
    
    
    
    
    
    
    
    (686,528
    )Three-for-two stock split in the
form of a dividend
    
    
    8,805
    
    
    
    
    
    
    
    (8,805
    )
    
    
    
    
    
    
    
    
    
    
    Tax effect of the ESOP dividend
    
    
    
    
    
    
    23,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,111Tax effect of the exercise of non-
ISO stock options
    
    
    
    
    
    
    42,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,315Balance at December 31, 2006
    
    
    26,423
    
    
    
    9,499,946
    
    
    
    28,353,792
    
    
    
    (53,822
    )
    
    
    (97,002
    )
    
    
    37,729,337Comprehensive IncomeNet Income
    
    
    
    
    
    
    
    
    
    
    5,105,635
    
    
    
    
    
    
    
    
    
    
    
    5,105,635Unrealized Holding Losses on
investment securities net of tax
of $12,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,275
    )
    
    
    
    
    
    
    (19,275
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,086,360Cash dividend  $0.40 per share
    
    
    
    
    
    
    
    
    
    
    (1,062,064
    )
    
    
    
    
    
    
    
    
    
    
    (1,062,064
    )Excess of fair market value over
cost of leveraged ESOP shares
released
    
    
    
    
    
    
    36,814
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,814Exercise of stock options
    
    
    103
    
    
    
    73,717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,820Proceeds of private placement
    
    
    2,683
    
    
    
    7,039,011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,041,694Net change in unearned ESOP
shares
    
    
    (72
    )
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    (229,651
    )
    
    
    (229,623
    )Repurchase of common stock
    
    
    (37
    )
    
    
    
    
    
    
    (94,010
    )
    
    
    
    
    
    
    
    
    
    
    (94,047
    )Stock-based compensation
    
    
    
    
    
    
    264,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264,785Balance at December 31, 2007
    
    $
    29,100
    
    
    $
    16,914,373
    
    
    $
    32,303,353
    
    
    $
    (73,097
    )
    
    $
    (326,653
    )
    
    $
    48,847,076
 
 *
    
    See notes to consolidated financial statements*
    
    All per share amounts have been adjusted for the three-for-two stock split which occurred in December 2006 19




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Statements of Cash Flows
For the Years Ended December 31, 2007 and 2006
 2007
    
    
    2006Cash Flows from Operating ActivitiesNet income
    
    $
    5,105,635
    
    
    $
    4,441,257Adjustments to reconcile net income to net cash provided by operating activitiesProvision for loan losses
    
    
    854,739
    
    
    
    405,809Loss (Gain) on sales of investment securities
    
    
    27,335
    
    
    
    (197,001
    )Depreciation and amortization
    
    
    1,122,464
    
    
    
    1,001,638Net amortization of premium/discount on
mortgage backed securities and investments
    
    
    192,004
    
    
    
    27,749Stock based compensation expense
    
    
    264,785
    
    
    
    Excess tax benefits on stock-based compensation
    
    
    
    
    
    
    (42,315
    )Increase in cash surrender of Bank owned life insurance
    
    
    (361,527
    )
    
    
    (328,586
    )Deferred income tax benefit
    
    
    (392,194
    )
    
    
    (412,681
    )Increase in accrued interest receivable
    
    
    (310,156
    )
    
    
    (430,871
    )Decrease in deferred loan fees
    
    
    (119,081
    )
    
    
    (113,379
    )(Decrease) Increase in accrued expenses and other liabilities
    
    
    (135,725
    )
    
    
    1,801,223(Increase) Decrease in other assets
    
    
    (350,346
    )
    
    
    161,738Gain on sale of other real estate owned
    
    
    (1,272,161
    )
    
    
    Net Cash Provided By Operating Activities
    
    
    4,625,771
    
    
    
    6,314,581Cash Flows From Investing ActivitiesPurchase of investment securities available for sale
    
    
    (309,253
    )
    
    
    (3,127,695
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    408,313
    
    
    
    1,033,358Purchase of investment securities held to maturity
    
    
    (11,009,199
    )
    
    
    (5,100,000
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    15,936,450
    
    
    
    23,766,300Net sales of FHLB and Federal Reserve stock
    
    
    745,900
    
    
    
    1,089,900Loans originated or acquired
    
    
    (194,267,624
    )
    
    
    (181,343,309
    )Principal collected on loans
    
    
    162,397,632
    
    
    
    128,163,333Purchase of premises and equipment
    
    
    (3,723,304
    )
    
    
    (1,363,554
    )Proceeds from disposal of premises and equipment
    
    
    4,000
    
    
    
    Purchase of Bank owned life insurance policies
    
    
    (1,000,000
    )
    
    
    (2,000,000
    )Proceeds of sale of foreclosed real estate
    
    
    1,733,045
    
    
    
    14,677Net Cash Used In Investing Activities
    
    
    (29,084,040
    )
    
    
    (38,866,990
    )
 20




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Statements of Cash Flows
 For the Years Ended December 31, 2007 and 2006
 2007
    
    
    2006Cash Flows From Financing ActivitiesNet increase in deposits
    
    
    26,980,613
    
    
    
    54,639,662Net decrease in short-term borrowings
    
    
    (5,012,379
    )
    
    
    (13,507,273
    )Dividends paid
    
    
    (1,062,064
    )
    
    
    (972,966
    )Exercise of stock options
    
    
    73,820
    
    
    
    156,122Excess tax benefits on stock based compensation
    
    
    
    
    
    
    42,315Proceeds from private placement
    
    
    7,041,694
    
    
    
    177,500Net change in unearned ESOP shares
    
    
    (192,809
    )
    
    
    96,665Repurchase of common stock
    
    
    (94,047
    )
    
    
    (686,528
    )Proceeds from long-term borrowings
    
    
    5,000,000
    
    
    
    15,260,000Payments of long-term borrowings
    
    
    (15,040,428
    )
    
    
    (27,037,822
    )Net Cash Provided By Financing Activities
    
    
    17,694,400
    
    
    
    28,167,675Decrease In Cash And Cash Equivalents
    
    
    (6,763,869
    )
    
    
    (4,384,734
    )Cash and Cash Equivalents at Beginning of Year
    
    
    18,190,506
    
    
    
    22,575,240Cash and Cash Equivalents at End of Year
    
    $
    11,426,637
    
    
    $
    18,190,506Supplementary Cash Flow InformationCash paid during the year forInterest
    
    $
    19,679,622
    
    
    $
    18,057,377Income taxes
    
    $
    3,942,600
    
    
    $
    2,567,400
 
 *
    
    See notes to consolidated financial statements 21




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
 Nature of Operations
 Use of Estimates
 Significant Group Concentrations of Credit Risk
 Cash and Cash Equivalents
 Securities
  Loans Held for Sale
 22




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Loans Receivable
    Allowance for Loan Losses
    23




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Servicing
   Premises and Equipment
 
  Foreclosed Real Estate
 Transfers of Financial Assets
 Advertising Costs
 Income Taxes
 24




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Off Balance Sheet Credit Related Financial Instruments
 Stock-Based Compensation
   Earnings Per Common Share
 Years Ended December 31,2007
    
    
    2006Net Income
    
    $
    5,105,635
    
    
    $
    4,441,257Average number of common shares outstanding
    
    
    2,664,036
    
    
    
    2,637,531Effect of dilutive options
    
    
    188,458
    
    
    
    178,454Average number of shares used to calculate
diluted earnings per share
    
    
    2,852,494
    
    
    
    2,815,985
  Comprehensive Income
  25




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31,2007
    
    
    2006Net Income
    
    $
    5,105,635
    
    
    $
    4,441,257Other comprehensive income itemsUnrealized holding gains (losses) on available for sale securities net of
tax expense (benefit) of ($22,684) and $9,136, respectively
    
    
    (36,053
    )
    
    
    17,735Plus: reclassification adjustment for losses (gains) net of tax (provision)
of $10,557 and ($76,082), respectively.
    
    
    16,778
    
    
    
    (120,919
    )Total other comprehensive loss
    
    
    (19,275
    )
    
    
    (103,184
    )Total comprehensive income
    
    $
    5,086,360
    
    
    $
    4,338,073
 Recent Accounting Pronouncements
 Fair Value Measurements
 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements Employers
Accounting for Postretirement Benefits Other Than Pensions
 The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115.
 Business Combination.
 Noncontrolling Interests in Consolidated Financial
Statement.
 26




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 2  RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
  NOTE 3  SECURITIES
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueSecurities available for saleAsset-backed securities issued by GSEs
    
    $
    5,722,921
    
    
    $
    21,970
    
    
    $
    241,443
    
    
    $
    5,503,448Corporate equity securities
    
    
    199,710
    
    
    
    51,073
    
    
    
    
    
    
    
    250,783Bond mutual funds
    
    
    3,332,190
    
    
    
    58,960
    
    
    
    1,312
    
    
    
    3,389,838Total securities available for sale
    
    $
    9,254,821
    
    
    $
    132,003
    
    
    $
    242,755
    
    
    $
    9,144,069Securities held-to-maturityAsset-backed securities issued byGSEs
    
    $
    66,568,861
    
    
    $
    129,531
    
    
    $
    1,373,692
    
    
    $
    65,324,700Other
    
    
    25,282,946
    
    
    
    127,600
    
    
    
    251,912
    
    
    
    25,158,634Total debt securities held-to-maturity
    
    
    91,851,807
    
    
    
    257,131
    
    
    
    1,625,604
    
    
    
    90,483,334U.S. Government obligations
    
    
    798,635
    
    
    
    
    
    
    
    
    
    
    
    798,635Other investments
    
    
    37,161
    
    
    
    
    
    
    
    
    
    
    
    37,161Total securities held-to-maturity
    
    $
    92,687,603
    
    
    $
    257,131
    
    
    $
    1,625,604
    
    
    $
    91,319,130
 December 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueSecurities available for saleAsset-backed securities issued by GSEs
    
    $
    5,882,361
    
    
    $
    22,429
    
    
    $
    206,930
    
    
    $
    5,697,860Corporate equity securities
    
    
    254,810
    
    
    
    86,873
    
    
    
    
    
    
    
    341,683Bond mutual funds
    
    
    3,246,054
    
    
    
    18,173
    
    
    
    2,094
    
    
    
    3,262,133Total securities available for sale
    
    $
    9,383,225
    
    
    $
    127,475
    
    
    $
    209,024
    
    
    $
    9,301,676Securities held-to-maturityAsset-backed securities issued by:GSEs
    
    $
    66,904,325
    
    
    $
    208,890
    
    
    $
    1,716,038
    
    
    $
    65,397,177Other
    
    
    29,955,894
    
    
    
    211,181
    
    
    
    360,726
    
    
    
    29,806,349Total debt securities held-to-maturity
    
    
    96,860,219
    
    
    
    420,071
    
    
    
    2,076,764
    
    
    
    95,203,526U.S. Government obligations
    
    
    800,000
    
    
    
    
    
    
    
    
    
    
    
    800,000Other investments
    
    
    144,630
    
    
    
    
    
    
    
    
    
    
    
    144,630Total securities held-to-maturity
    
    $
    97,804,849
    
    
    $
    420,071
    
    
    $
    2,076,764
    
    
    $
    96,148,156
 27




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Continuous unrealized losses existing for:Less Than 12
    
    
    More Than 12
    
    
    Total unrealizedFair Value
    
    
    Months
    
    
    Months
    
    
    LossesAsset-backed securities issued by GSEs:
    
    $
    5,114,453
    
    
    $
    
    
    
    $
    241,443
    
    
    $
    241,443Bond mutual funds
    
    
    39,469
    
    
    
    
    
    
    
    1,312
    
    
    
    1,312$
    5,153,922
    
    
    $
    
    
    
    $
    242,755
    
    
    $
    242,755
    Continuous unrealized losses existing for:Less Than 12
    
    
    More Than 12
    
    
    Total unrealizedFair Value
    
    
    Months
    
    
    Months
    
    
    LossesAsset-backed securities issued by GSEs:
    
    $
    57,149,185
    
    
    $
    153,557
    
    
    $
    1,220,135
    
    
    $
    1,373,692Asset-backed securities issued by other
    
    
    13,812,817
    
    
    
    37,784
    
    
    
    214,128
    
    
    
    251,912$
    70,962,002
    
    
    $
    191,341
    
    
    $
    1,434,263
    
    
    $
    1,625,604
   28




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Available for Sale
    
    
    Held to MaturityEstimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueWithin one year
    
    $
    3,332,190
    
    
    $
    3,389,838
    
    
    $
    798,635
    
    
    $
    798,635Over one year, through five years
    
    
    
    
    
    
    
    
    
    
    37,161
    
    
    
    37,1613,332,190
    
    
    
    3,389,838
    
    
    
    835,796
    
    
    
    835,796Asset-backed and equity securities
    
    
    5,922,631
    
    
    
    5,754,231
    
    
    
    91,851,806
    
    
    
    90,483,334$
    9,254,821
    
    
    $
    9,144,069
    
    
    $
    92,687,603
    
    
    $
    91,319,130
  NOTE 4  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
  2007
    
    
    2006Commercial real estate
    
    $
    190,483,998
    
    
    $
    177,923,349Residential first mortgages
    
    
    90,931,572
    
    
    
    80,781,270Construction and land development
    
    
    50,577,491
    
    
    
    42,746,306Home equity and second mortgage
    
    
    24,649,581
    
    
    
    24,572,235Commercial loans
    
    
    75,247,410
    
    
    
    79,629,910Consumer loans
    
    
    2,464,594
    
    
    
    2,812,945Commercial equipment
    
    
    24,113,223
    
    
    
    18,287,840458,467,869
    
    
    
    426,753,855Less:Deferred loan fees
    
    
    371,253
    
    
    
    490,335Allowance for loan loss
    
    
    4,482,483
    
    
    
    3,783,7214,853,736
    
    
    
    4,274,056$
    453,614,133
    
    
    $
    422,479,799
  2007
    
    
    2006Balance January 1,
    
    $
    3,783,721
    
    
    $
    3,383,334Add:Provision charged to operations
    
    
    854,739
    
    
    
    405,809Recoveries
    
    
    194
    
    
    
    2,759Less:Charge-offs
    
    
    156,171
    
    
    
    8,181Balance, December 31
    
    $
    4,482,483
    
    
    $
    3,783,721
 29




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Year Ended December 31,2007
    
    
    2006Balance, beginning of year
    
    $
    3,179,142
    
    
    $
    1,682,994New loans made during year
    
    
    2,429,595
    
    
    
    1,967,257Repayments made during year
    
    
    (419,125
    )
    
    
    (991,108
    )Changes due to change in directors and officers
    
    
    
    
    
    
    520,000Balance, end of year
    
    $
    5,189,612
    
    
    $
    3,179,142
 NOTE 5  LOAN SERVICING
   Year Ended December 31,2007
    
    
    2006Balance at beginning of the year
    
    $
    204,859
    
    
    $
    326,061Amortization
    
    
    (121,200
    )
    
    
    (121,202
    )$
    83,659
    
    
    $
    204,859
 NOTE 6  FORECLOSED REAL ESTATE
  Year Ended December 31,2007
    
    
    2006Balance at beginning of the year
    
    $
    671,740
    
    
    $
    671,740Disposal of underlying property
    
    
    (671,740
    )
    
    
    Balance at end of year
    
    $
    
    
    
    $
    671,740
  30




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year Ended December 31,2007
    
    
    2006Net gain on sale of foreclosed real estate
    
    $
    1,276,161
    
    
    $
    Operating expenses
    
    
    
    
    
    
    (3,632
    )$
    1,276,161
    
    
    $
    (3,632
    )
 NOTE 7  PREMISES AND EQUIPMENT
  2007
    
    
    2006Land
    
    $
    3,073,767
    
    
    $
    2,096,381Building and improvements
    
    
    7,838,083
    
    
    
    5,856,357Furniture and equipment
    
    
    3,374,160
    
    
    
    3,021,560Automobiles
    
    
    241,711
    
    
    
    168,426Total cost
    
    
    14,527,721
    
    
    
    11,142,724Less accumulated depreciation
    
    
    5,104,419
    
    
    
    4,320,263Premises and equipment, net
    
    $
    9,423,302
    
    
    $
    6,822,461
  2007
    
    $
    480,3022008
    
    
    454,1042009
    
    
    306,1522010
    
    
    309,9832011
    
    
    259,921Thereafter
    
    
    3,658,997Total
    
    $
    5,469,459
  NOTE 8  DEPOSITS
  2007
    
    
    2006Noninterest-bearing demand
    
    $
    48,041,571
    
    
    $
    43,723,436Interest-bearing:Demand
    
    
    46,013,651
    
    
    
    41,117,213Money market deposits
    
    
    99,169,429
    
    
    
    91,072,187Savings
    
    
    25,674,548
    
    
    
    30,187,404Certificates of deposit
    
    
    226,094,816
    
    
    
    211,913,163Total interest-bearing
    
    
    396,952,444
    
    
    
    374,289,967Total deposits
    
    $
    444,994,015
    
    
    $
    418,013,403
 31




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   2008
    
    $
    187,067,0602009
    
    
    29,069,5932010
    
    
    6,521,1652011
    
    
    1,705,3122012
    
    
    1,731,686$
    226,094,816
 NOTE 9  SHORT-TERM BORROWINGS AND LONG-TERM DEBT
  Fixed
    
    Fixed Rate
    
    VariableRate
    
    Convertible
    
    Convertible2007Highest rate
    
    
    5.15
    %
    
    
    6.25
    %
    
    
    4.43
    %Lowest rate
    
    
    1.00
    %
    
    
    3.27
    %
    
    
    4.43
    %Weighted average rate
    
    
    4.33
    %
    
    
    4.70
    %
    
    
    4.43
    %Matures through
    
    
    2036
    
    
    
    2014
    
    
    
    20202006Highest rate
    
    
    5.15
    %
    
    
    6.25
    %
    
    
    4.91
    %Lowest rate
    
    
    1.00
    %
    
    
    3.27
    %
    
    
    4.17
    %Weighted average rate
    
    
    4.29
    %
    
    
    4.70
    %
    
    
    4.65
    %Matures through
    
    
    2036
    
    
    
    2014
    
    
    
    2020
  At or for the Year Ended December 31,(dollars in thousands)2007
    
    
    2006Long-term debtMaximum outstanding long-term debt of any month end
    
    $
    96,042
    
    
    $
    108,078Average outstanding long-term debt
    
    
    86,993
    
    
    
    101,520Approximate average rate paid on long-term debt
    
    
    5.16
    %
    
    
    4.42
    %Short-term debtMaximum outstanding short-term debt at any month end
    
    $
    5,555
    
    
    $
    37,590Average outstanding short-term debt
    
    
    2,902
    
    
    
    18,129Approximate average rate paid on short-term debt
    
    
    3.51
    %
    
    
    4.99
    %
   32




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  December 31, 2007Fixed
    
    
    Fixed Rate
    
    
    Variable RateRate
    
    
    Convertible
    
    
    Convertible
    
    
    TotalDue in 2008
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Due in 2009
    
    
    30,000,000
    
    
    
    
    
    
    
    
    
    
    
    30,000,000Due in 2010
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    
    
    
    
    20,000,000Due in 2011
    
    
    10,000,000
    
    
    
    
    
    
    
    
    
    
    
    10,000,000Due in 2012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Thereafter
    
    
    1,005,508
    
    
    
    15,000,000
    
    
    
    10,000,000
    
    
    
    26,005,508$
    51,005,508
    
    
    $
    25,000,000
    
    
    $
    10,000,000
    
    
    $
    86,005,508
    NOTE 10  INCOME TAXES
  2007
    
    
    2006CurrentFederal
    
    $
    2,681,047
    
    
    $
    2,014,469State
    
    
    684,909
    
    
    
    562,6273,365,956
    
    
    
    2,577,096DeferredFederal
    
    
    (335,726
    )
    
    
    (347,874
    )State
    
    
    (56,468
    )
    
    
    (64,807
    )(392,194
    )
    
    
    (412,681
    )Total Income Tax Expense
    
    $
    2,973,762
    
    
    $
    2,164,415
  33




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2007
    
    
    2006Percent of
    
    
    
    
    
    
    Percent ofPre-Tax
    
    
    
    
    
    
    Pre-TaxAmount
    
    
    Income
    
    
    Amount
    
    
    IncomeExpected income tax expense at
federal tax rate
    
    $
    2,746,995
    
    
    
    34.00
    %
    
    $
    2,245,928
    
    
    
    34.00
    %State taxes net of federal benefit
    
    
    414,771
    
    
    
    5.13
    %
    
    
    328,561
    
    
    
    4.97
    %Nondeductible expenses
    
    
    62,131
    
    
    
    0.77
    %
    
    
    4,779
    
    
    
    0.07
    %Nontaxable income
    
    
    (221,942
    )
    
    
    (2.75
    %)
    
    
    (196,225
    )
    
    
    (2.97
    %)Other
    
    
    (28,193
    )
    
    
    (0.35
    %)
    
    
    (218,628
    )
    
    
    (3.31
    %)$
    2,973,762
    
    
    
    36.81
    %
    
    $
    2,164,415
    
    
    
    32.76
    %
  2007
    
    
    2006Deferred tax assets:Deferred fees
    
    $
    2,492
    
    
    $
    3,298Allowance for loan losses
    
    
    1,701,537
    
    
    
    1,431,675Deferred compensation
    
    
    954,910
    
    
    
    704,417Valuation allowance on foreclosed real estate
    
    
    
    
    
    
    259,991Unrealized loss on investment
securities available for sale
    
    
    37,656
    
    
    
    27,7262,696,595
    
    
    
    2,427,107Deferred tax liabilities:FHLB stock dividends
    
    
    152,896
    
    
    
    152,896Depreciation
    
    
    230,309
    
    
    
    362,946383,205
    
    
    
    515,842$
    2,313,390
    
    
    $
    1,911,265
  NOTE 11  COMMITMENTS AND CONTINGENCIES
    34




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 12  STOCK OPTION AND INCENTIVE PLAN
  2007
    
    2006Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    417,099
    
    
    $
    13.86
    
    
    
    444,753
    
    
    $
    13.59Granted
    
    
    21,811
    
    
    
    27.70
    
    
    
    Exercised
    
    
    (10,289
    )
    
    
    7.17
    
    
    
    (19,585
    )
    
    
    7.97Forfeitures
    
    
    
    
    
    
    
    
    
    
    (8,070
    )
    
    
    13.24Outstanding at end of year
    
    
    428,621
    
    
    
    14.72
    
    
    
    417,099
    
    
    
    13.86
  WeightedNumber Outstanding
    
    Weighted Average
    
    AverageDecember 31, 2007
    
    Remaining Contractual Life
    
    Exercise Price22,904
    
    
    1 years
    
    $
    7.1623,126
    
    
    2 years
    
    
    7.8837,639
    
    
    3 years
    
    
    7.9040,851
    
    
    4 years
    
    
    7.9022,822
    
    
    5 years
    
    
    11.5671,088
    
    
    6 years
    
    
    12.9199,878
    
    
    7 years
    
    
    15.8988,502
    
    
    8 years
    
    
    22.2921,811
    
    
    10 years
    
    
    27.70428,621
    
    
    
    
    
    14.72
   35




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2007Expected dividend yield
    
    
    1.32
    %Expected stock price volatility
    
    
    31.95Risk-free interest rate
    
    
    5.05Expected life of options
    
    
    10Weighted average fair value
    
    $
    12.14
 NOTE 13EMPLOYEE BENEFIT PLANS
    
 NOTE 14REGULATORY MATTERS
    36




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  To be considered wellcapitalized underRequired for capital
    
    promptActual
    
    adequacy purposes
    
    corrective actionAt December 31, 2007Total Capital (to risk weighted assets)The Company
    
    $
    65,620
    
    
    
    13.80
    %
    
    $
    38,051
    
    
    
    8.00
    %The Bank
    
    $
    64,410
    
    
    
    13.58
    %
    
    $
    37,954
    
    
    
    8.00
    %
    
    $
    47,443
    
    
    
    10.00
    %Tier 1 Capital (to risk weighted assets)The Company
    
    $
    61,077
    
    
    
    12.84
    %
    
    $
    19,026
    
    
    
    4.00
    %The Bank
    
    $
    59,867
    
    
    
    12.62
    %
    
    $
    18,977
    
    
    
    4.00
    %
    
    $
    28,466
    
    
    
    6.00
    %Tier 1 Capital (to average assets)The Company
    
    $
    61,077
    
    
    
    10.41
    %
    
    $
    23,458
    
    
    
    4.00
    %The Bank
    
    $
    59,867
    
    
    
    10.23
    %
    
    $
    23,418
    
    
    
    4.00
    %
    
    $
    29,272
    
    
    
    5.00
    %At December 31,2006Total Capital (to risk weighted assets)The Company
    
    $
    53,504
    
    
    
    11.98
    %
    
    $
    35,723
    
    
    
    8.00
    %The Bank
    
    $
    52,388
    
    
    
    11.78
    %
    
    $
    35,648
    
    
    
    8.00
    %
    
    $
    44,560
    
    
    
    10.00
    %Tier 1 Capital (to risk weighted assets)The Company
    
    $
    49,675
    
    
    
    11.12
    %
    
    $
    17,862
    
    
    
    4.00
    %The Bank
    
    $
    48,559
    
    
    
    10.92
    %
    
    $
    17,824
    
    
    
    4.00
    %
    
    $
    26,736
    
    
    
    6.00
    %Tier 1 Capital (to average assets)The Company
    
    $
    49,675
    
    
    
    8.74
    %
    
    $
    22,722
    
    
    
    4.00
    %The Bank
    
    $
    48,559
    
    
    
    8.58
    %
    
    $
    22,682
    
    
    
    4.00
    %
    
    $
    28,353
    
    
    
    5.00
    %
 NOTE 15FAIR VALUE OF FINANCIAL INSTRUMENTS
  37




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year Ended December 31, 2007
    
    Year Ended December 31, 2006Carrying
    
    Estimated Fair
    
    Carrying
    
    Estimated FairAmount
    
    Value
    
    Amount
    
    ValueAssetsCash and cash equivalents
    
    $
    11,677,420
    
    
    $
    11,677,420
    
    
    $
    18,190,506
    
    
    $
    18,190,506Investment securities and stock in FHLB
and FRB
    
    
    107,186,172
    
    
    
    105,817,699
    
    
    
    113,206,926
    
    
    
    111,550,233Loans receivable, net
    
    
    453,614,133
    
    
    
    462,328,386
    
    
    
    422,479,799
    
    
    
    425,336,840LiabilitiesSavings, NOW, and money market accounts
    
    
    218,899,199
    
    
    
    218,899,199
    
    
    
    206,100,240
    
    
    
    206,100,240Time certificates
    
    
    226,094,816
    
    
    
    226,973,013
    
    
    
    211,913,163
    
    
    
    211,025,358Long-term debt and other borrowed funds
    
    
    87,560,831
    
    
    
    87,129,375
    
    
    
    102,613,638
    
    
    
    101,093,038Guaranteed preferred beneficial interest in
junior subordinated securities
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    12,000,000
  Valuation Methodology Cash and Cash Equivalents
 Investment Securities
 Loans Receivable
 Deposits
 Time Certificates
 Long-Term Debt and Other Borrowed Funds
 Guaranteed Preferred Beneficial Interest in Junior Subordinated Securities 
 Off-Balance Sheet Instruments
  38




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 16  GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES
    NOTE 17  PRIVATE PLACEMENTS
   NOTE 18  CONDENSED FINANCIAL STATEMENTS  PARENT COMPANY ONLY
 Balance SheetsAs of December 31,2007
    
    
    2006AssetsCash  noninterest bearing
    
    $
    256,965
    
    
    $
    799,984Cash  interest bearing
    
    
    156,120
    
    
    
    155,244Investment securities available for sale
    
    
    39,215
    
    
    
    37,475Investment in wholly owned subsidiaries
    
    
    60,166,153
    
    
    
    48,985,298Other assets
    
    
    1,170,281
    
    
    
    565,881Total assets
    
    $
    61,788,735
    
    
    $
    50,543,882
 39




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Balance SheetsAs of December 31,2007
    
    
    2006Liabilities and Stockholders EquityCurrent liabilities
    
    $
    569,659
    
    
    $
    442,545Guaranteed preferred beneficial interest in
junior subordinated debentures
    
    
    12,372,000
    
    
    
    12,372,000Total liabilities
    
    
    12,941,659
    
    
    
    12,814,545Stockholders EquityCommon stock
    
    
    29,100
    
    
    
    26,423Surplus
    
    
    16,914,373
    
    
    
    9,499,946Retained earnings
    
    
    32,303,353
    
    
    
    28,353,792Total accumulated other comprehensive loss
    
    
    (73,097
    )
    
    
    (53,822
    )Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (97,002
    )Total Stockholders Equity
    
    
    48,847,076
    
    
    
    37,729,337Total Liabilities and
Stockholders Equity
    
    $
    61,788,735
    
    
    $
    50,543,882
 Condensed Statements of IncomeYears Ended December 31,2007
    
    
    2006Dividends from subsidiary
    
    $
    2,000,000
    
    
    $
    2,000,000Interest income
    
    
    52,425
    
    
    
    16,220Interest expense
    
    
    967,079
    
    
    
    891,890Net interest income
    
    
    1,085,346
    
    
    
    1,124,330Miscellaneous expenses
    
    
    (961,945
    )
    
    
    (420,129
    )Income before income taxes and equity in
undistributed net income of subsidiary
    
    
    123,401
    
    
    
    704,201Federal and state income tax benefit
    
    
    604,401
    
    
    
    439,804Equity in undistributed net income of subsidiary
    
    
    4,377,833
    
    
    
    3,297,252NET INCOME
    
    $
    5,105,635
    
    
    $
    4,441,257
 Condensed Statements of Cash FlowsYears Ended December 31,2007
    
    
    2006Cash Flows from Operating ActivitiesNet income
    
    $
    5,105,635
    
    
    $
    4,441,257Adjustments to reconcile net income to net cash provided by
operating activitiesEquity in undistributed earnings of subsidiary
    
    
    (4,377,833
    )
    
    
    (3,297,252
    )Increase in other assets
    
    
    (523,746
    )
    
    
    (28,023
    )Deferred income tax benefit
    
    
    (80,654
    )
    
    
    (56,117
    )Increase in current liabilities
    
    
    127,113
    
    
    
    34,877Net Cash Provided By Operating Activities
    
    
    250,515
    
    
    
    1,094,742Cash Flows from Investing ActivitiesPurchase of investment securities available for sale
    
    
    (1,740
    )
    
    
    (1,637
    )Net Cash Used By Investing Activities
    
    
    (1,740
    )
    
    
    (1,637
    )Cash Flows from Financing ActivitiesDividends paid
    
    
    (1,062,064
    )
    
    
    (972,966
    )Proceeds from private placement
    
    
    7,041,694
    
    
    
    177,500Downstream of capital to subsidiary
    
    
    (6,822,297
    )
    
    
    Exercise of stock options
    
    
    73,820
    
    
    
    198,437Stock based compensation
    
    
    264,785
    
    
    
    Net change in ESOP loan
    
    
    (192,809
    )
    
    
    96,665Redemption of common stock
    
    
    (94,047
    )
    
    
    (686,528
    )Net Cash Used In Financing Activities
    
    
    (790,918
    )
    
    
    (1,186,892
    )
 40




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Statements of Cash FlowsYears Ended December 31,2007
    
    
    2006Decrease In Cash
    
    
    (542,143
    )
    
    
    (93,787
    )Cash At Beginning of Year
    
    
    955,228
    
    
    
    1,049,015Cash At End of Year
    
    $
    413,085
    
    
    $
    955,228
 NOTE 19QUARTERLY FINANCIAL COMPARISON
 2007
    
    2006Fourth
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterInterest and dividend income
    
    $
    9,694,195
    
    
    $
    9,941,838
    
    
    $
    9,737,887
    
    
    $
    9,524,192
    
    
    $
    9,371,065
    
    
    $
    9,186,802
    
    
    $
    8,827,910
    
    
    $
    8,299,959Interest Expense
    
    
    4,868,029
    
    
    
    5,118,104
    
    
    
    4,939,047
    
    
    
    4,981,032
    
    
    
    4,995,112
    
    
    
    4,844,077
    
    
    
    4,473,923
    
    
    
    4,045,816Net interest income
    
    
    4,826,166
    
    
    
    4,823,734
    
    
    
    4,798,840
    
    
    
    4,543,160
    
    
    
    4,375,953
    
    
    
    4,342,725
    
    
    
    4,353,987
    
    
    
    4,254,143Provision for loan loss
    
    
    195,451
    
    
    
    304,845
    
    
    
    97,917
    
    
    
    256,526
    
    
    
    116,674
    
    
    
    116,563
    
    
    
    86,087
    
    
    
    86,485Net interest income after
provision
    
    
    4,630,715
    
    
    
    4,518,889
    
    
    
    4,700,923
    
    
    
    4,286,634
    
    
    
    4,259,279
    
    
    
    4,226,162
    
    
    
    4,267,900
    
    
    
    4,167,658Noninterest income
    
    
    537,401
    
    
    
    1,761,048
    
    
    
    552,447
    
    
    
    550,693
    
    
    
    744,359
    
    
    
    519,452
    
    
    
    505,612
    
    
    
    477,718Noninterest expense
    
    
    3,826,883
    
    
    
    3,228,407
    
    
    
    3,142,913
    
    
    
    3,261,150
    
    
    
    3,162,634
    
    
    
    3,071,666
    
    
    
    3,197,613
    
    
    
    3,130,555Income before income taxes
    
    
    1,341,233
    
    
    
    3,051,530
    
    
    
    2,110,457
    
    
    
    1,576,177
    
    
    
    1,841,004
    
    
    
    1,673,948
    
    
    
    1,575,899
    
    
    
    1,514,821Provision for income taxes
    
    
    472,972
    
    
    
    1,165,891
    
    
    
    768,341
    
    
    
    566,558
    
    
    
    534,872
    
    
    
    570,895
    
    
    
    516,964
    
    
    
    541,684Net income
    
    $
    868,261
    
    
    $
    1,885,639
    
    
    $
    1,342,116
    
    
    $
    1,009,619
    
    
    $
    1,306,132
    
    
    $
    1,103,053
    
    
    $
    1,058,935
    
    
    $
    973,137Earnings per common shareBasic
    
    $
    0.24
    
    
    $
    0.71
    
    
    $
    0.51
    
    
    $
    0.38
    
    
    $
    0.50
    
    
    $
    0.42
    
    
    $
    0.40
    
    
    $
    0.37Diluted
    
    $
    0.23
    
    
    $
    0.67
    
    
    $
    0.47
    
    
    $
    0.36
    
    
    $
    0.46
    
    
    $
    0.39
    
    
    $
    0.37
    
    
    $
    0.35
 
 1
    
    All per share amounts have been adjusted for the three for
two stock split in December 2006.2
    
    Earnings per share are based upon quarterly results and may not be
additive to the annual earnings per share amounts. 41